PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

See accompanying notes.

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CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

See accompanying notes.

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CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

See accompanying notes.

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On February 11, 2011, our Crosstex subsidiary acquired certain net assets of the sterilization monitoring business of ConFirm Monitoring Systems, Inc. (“ConFirm”(the “ConFirm Monitoring Business” or the “ConFirm Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. ConFirm’sIts results of operations are included in our results of operations for the three and nine months ended April 30,October 31, 2011 subsequent to its acquisition date and are excluded from the three and nine months ended April 30,October 31, 2010. The ConFirm Acquisition is included in our Healthcare Disposables segment.

On October 6, 2010, our Mar Cor subsidiary acquired from Gambro Renal Products, Inc. (“GRP”) and a Swedish-based affiliate of GRP (collectively, “Gambro”) certain net assets and the exclusive rights in the United States and Puerto Rico to manufacture and sell Gambro’s water treatment products used in the production of water for hemodialysis (“Gambro Water”(the “Gambro Business” or the “Gambro Acquisition”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Gambro Water’sIts results of operations are included in our results of operations for the three and nine months ended April 30,October 31, 2011 and the portion of the three months ended October 31, 2010 subsequent to its acquisition date and are excluded from the three and nine months ended April 30, 2010.

On June 1, 2010, we acquired all of the issued and outstanding stock of Purity Water Company of San Antonio, Inc. (“Purity”), as more fully described in Note 3 to the Condensed Consolidated Financial Statements. Purity’s results of operations aredate. The Gambro Acquisition is included in our results of operations for the threeWater Purification and nine months ended April 30, 2011 and are excluded from the three and nine months ended April 30, 2010.Filtration segment.

Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.

Subsequent Events

We performed a review of events subsequent to April 30,October 31, 2011. Based upon that review, no subsequent events occurred that required updating to our Condensed Consolidated Financial Statements or disclosures.

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Note 2.                   Stock-Based Compensation

The following table shows the income statement components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Income:

The above stock-based compensation expense before income taxes was recorded in the Condensed Consolidated Financial Statements as stock-based compensation expense and an increase to additional paid-in capital. The related income tax benefits were recorded as an increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and a reduction to income tax expense.

All of our stock options and stock awards (which consist only of restricted stock) are subject to graded vesting in which portions of the award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period, reduced by estimated forfeitures.  At April 30,October 31, 2011, total unrecognized stock-based compensation expense before income taxes related to total nonvested stock options and stock awards was $4,213,000$7,605,000 with a remaining weighted average period of 1523 months over which such expense is expected to be recognized.

We determine the fair value of each stock award using the closing market price of our Common Stock on the date of grant. Such stock awards are deductible for tax purposes (exclusive of stock awards granted to international employees) and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant.

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A summary of nonvested stock award activity follows:

There were no option grants during the three and nine months ended April 30, 2011. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions for options granted during the threeOctober 31, 2011 and nine months ended April 30, 2010:

(1)We declared our first dividend in January 2010. Since we did not issue dividends prior to that date, the dividend yield was zero for options granted prior to January 2010.

(2)Volatility was based on historical closing prices of our Common Stock.

(3)The U.S. Treasury rate on the expected life at the date of grant.

(4)Based on historical exercise behavior.

Additionally, all options were considered to be deductible for tax purposes in the valuation model, except for certain options granted to employees residing outside of the United States. Such non-qualified options were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant. For the three and nine months ended April 30, 2010, the weighted average fair value of all options granted was approximately $6.70 and $5.70, respectively.  The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $1,019,000$447,000 and $3,184,000$52,000 for the three and nine months ended April 30,October 31, 2011 respectively, and $683,000 and $1,490,000 for the three and nine months ended April 30, 2010, respectively.

A summary of stock option activity follows:

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Upon exercise of stock options or grant of stock awards, we typically issue new shares of our Common Stock (as opposed to using treasury shares).

If certain criteria are met when options are exercised or restricted stock becomes vested, the Company is allowed a deduction on its United States income tax return. Accordingly, we account for the income tax effect on such income tax deductions as a reduction of deferred income tax assets (which are netted with long-term deferred income tax liabilities) and as a reduction of income taxes payable.payable, with differences between actual tax deductions and the related deferred income tax assets recorded as additional paid-in capital. For the ninethree months ended April 30,October 31, 2011 and 2010, such income tax deductions reduced income taxes payable by $1,458,000$703,000 and $976,000,$107,000, respectively.

We classify the cash flows resulting from excess tax benefits as financing cash flows on our Condensed Consolidated Statements of Cash Flows. Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense which was determined based upon the award’s fair value.

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Additionally, the $10,000,000 stock portion of the purchase price was measured at fair value, which was determined using put option valuation models, to account for the discount for the multi-year lock up feature that prohibits the sellers of the Byrne Medical Business from trading the 401,123 shares of Cantel common stock during the three or four year lock-up period, which period is dependent upon whether BMI’s principal stockholder is employed by us on August 1, 2014. As a result of our valuation, the fair value of the 401,123 shares was determined to be $7,640,000, of which $7,310,000 was considered purchase price and $330,000 was determined to be compensation expense that will be expensed on a straight-line basis over the minimum lock up period of three years. The determinations of fair value using option-pricing models are affected by our stock price and risk free interest rate as well as assumptions regarding a number of subjective variables, including, but not limited to, the expected stock price volatility of our Common Stock over the expected life of the instrument and the expected dividend yield.

Since we will be continually remeasuring both the contingent consideration liability and the three-year price floor liability at each balance sheet date and recording changes in the respective fair values through our Condensed Consolidated Statements of Income, we will potentially have significant earnings volatility in our future results of operations until the completion of both the two year period relating to the contingent consideration and three year period relating to the price floor.

The components of the purchase price recorded on August 1, 2011, as explained above, consist of the following:

In connection with the acquisition, we acquired certain tangible assets including accounts receivable, inventories and equipment and assumed certain liabilities of BMI including trade payables, sales commissions payable and ordinary course business liabilities.

In conjunction with the acquisition of the Byrne Medical Business and the impending expiration of our existing credit facility, we entered into a $150,000,000 Second Amended and Restated Credit Agreement dated as of August 1, 2011 with our senior lenders to fund the cash consideration paid in and the costs associated with the acquisition, as well as to refinance our existing working capital credit facilities, as more fully described in Note 10 to the Condensed Consolidated Financial Statements.

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The purchase price was preliminarily allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $50,443,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes over fifteen years, has been included in our Endoscopy segment.

For the twelve months ended December 31, 2010, BMI’s latest audited fiscal year, BMI generated revenues and gross profit of $34,293,000 and $21,991,000, respectively.

Since the acquisition was completed on the first day of fiscal 2012, the results of operations of the Byrne Medical Business are included in our results of operations for the three months ended October 31, 2011 and are excluded from the three months ended October 31, 2010.  As a result of the acquisition, we changed the name of our reporting segment previously known as Endoscope Reprocessing to Endoscopy. The operations of the Byrne Medical Business are fully included within our Endoscopy segment.

For the three months ended October 31, 2011, the Byrne Medical Business added the following to the Endoscopy segment in our Condensed Consolidated Financial Statements:

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Excluding non-recurring charges directly related to the acquisition, the Byrne Medical Business added $3,079,000 to the segment operating income for the three months ended October 31, 2011. Such non-recurring charges include (i) acquisition-related charges of approximately $626,000 which were recorded in general administrative expenses in the three months ended October 31, 2011 and (ii) a net fair value change of $411,000 to the acquisition date inventory, contingent consideration liability and three year price floor liability as further described above. Additionally, the segment operating income for the three months ended October 31, 2011 excludes debt issuance costs relating to the Second Amended and Restated Credit Agreement of approximately $1,405,000, which is being amortized to interest expense over the life of the credit facilities, and interest expense relating to the borrowings under our credit facilities to fund a significant portion of the purchase price.

The principal reasons for the acquisition of the Byrne Medical Business were as follows: (i) the complementary nature of its infection prevention and control business which further expands our business into hospital and outpatient center-based GI endoscopy; (ii) the addition of a market leading, high margin business in a familiar segment in infection prevention and control; (iii) the increase in the percentage of our net sales derived from recurring consumables; (iv) the expectation that the acquisition increases overall corporate gross margin percentage and will be accretive to our future earnings per share; (v) the belief that the endoscopy market will convert from re-using to disposing of certain components in GI endoscopy; and (vi) the opportunity for us to further expand our business into the design, manufacture and distribution of proprietary products. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of goodwill.

Selected unaudited supplemental pro forma consolidated statements of income data for the three months ended October 31, 2011 and 2010 assuming that the Byrne Medical Business was included in our results of operations as of August 1, 2010 (the beginning of our fiscal 2011) are as follows:

Supplemental pro forma data for the three months ended October 31, 2011 was adjusted to exclude acquisition-related costs of $626,000 and a fair value adjustment charge of $893,000 related to the step-up in the fair value of inventories. The three months ended October 31, 2010 supplemental pro forma data was adjusted to include these amounts. In addition, in order to affect the unaudited pro forma consolidated statement of income data for the three months ended October 31, 2010, the operating results of Cantel for the three months ended October 31, 2010 were consolidated with the operating results of the Byrne Medical Business for the third quarter of its fiscal year ended December 31, 2010 and were further adjusted to include (i) amortization of intangible assets and depreciation and amortization of property and equipment based upon the

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preliminary appraised fair values and useful lives of such assets, (ii) interest expense including interest on the senior bank debt at an effective interest rate of 2.98% per annum and amortization of new debt issuance costs over the life of the credit facilities, (iii) the elimination of certain expenses unrelated to the acquired assets of the Byrne Medical Business; (iv) the elimination of incentive compensation for the former primary owner in excess of incentive compensation consistent with the terms of his new employment contract; (v) a decrease of $40,000 to general and administrative expense relating to a net change in fair value of the contingent consideration and the three-year price floor solely to reflect the passage of time (the three months ended October 31, 2011 includes a decrease to general and administrative expenses to reflect the actual net fair value adjustment of $482,000 relating to such items as further described above) and (vi) income tax expense calculated using our fiscal 2011 consolidated U.S. effective tax rate. All other operating results reflect actual performance.

This pro forma information is provided for illustrative purposes only, and does not necessarily indicate what the operating results of the combined company might have been had the acquisition actually occurred at the beginning of fiscal 2011, nor does it necessarily indicate the combined company’s future operating results.

ConFirm Monitoring Systems, Inc.

On February 11, 2011, our Crosstex subsidiary acquired certain net assets ofthe ConFirm relating to its sterilization monitoring business. ConFirm isMonitoring Business, a private company based in Englewood, Colorado with pre-acquisition annual revenues of approximately $4,000,000 relating to biological monitoring services for dental and other healthcare customers located primarily in North America. The company offers both a mail-in service and in-office spore test kits for healthcare professionals to verify the performance of their sterilizers in accordance with industry guidelines for daily or weekly testing. The ConFirm Acquisition is included in our Healthcare Disposables segment. Total consideration for the transaction, excluding transaction costs of $52,000, was $7,500,000 plus contingent consideration of up to an additional $1,000,000 based upon achievement of specified sales levels through January 31, 2012.

We account for contingent consideration in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations,” (“ASC 805”), which requires us to recordby recording the fair value of contingent consideration as a liability and a reduction ofan increase to goodwill at the date of the acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through our Condensed Consolidated Statements of Income.  Accordingly, on February 11, 2011 we increased acquisitions payable and decreased goodwill by $656,000 to record our initial estimated fair value of the contingent consideration that would be earned by January 31, 2012. At April 30,July 31, 2011, we re-measuredincreased acquisitions payable to $775,000 by recording the $119,000 change in the fair value through our Consolidated Statements of Income for the year ended July 31, 2011. At October 31, 2011, the fair value of this contingent consideration liability decreased to $689,000. The $86,000 change in fair value was recorded as a decrease to acquisitions payable and determinedgeneral and administrative expenses in the Condensed Consolidated Financial Statements at October 31, 2011. This change in estimated fair value had not changed.was driven by changes in the assumptions pertaining to the achievement of the specified sales levels, partially offset by the accretion of the liability for the time value of money.

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The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $1,217,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in our Water Purification and Filtration reporting segment.

The primary reason for the acquisition was to add a base of business and expand the Mar Cor service network in the southwest United States. Following the acquisition, Purity was merged with, and into, Mar Cor.

The acquisition of Purity is included in our results of operations for the three and nine months ended April 30, 2011 and is excluded from our results of operations for the three and nine months ended April 30, 2010. Pro forma consolidated statements of income data have not been presented due to the insignificant impact of this acquisition.

Note 4.Recent Accounting Pronouncements

In December 2010,September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-08, “Intangibles — Goodwill and Other,” (“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 will not have any impact upon our financial position and results of operations.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”), which requires entities to present net

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valued with a Level 3 method, of the three-tier fair value hierarchy established by ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), as more fully described in Note 7 to the Condensed Consolidated Financial Statements. ASU 2010-06 also clarifies the existing guidance to require fair value measurement disclosures for each class of assets and liabilities. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 for Level 1 and 2 disclosure requirements, which was adopted in our third quarter of fiscal 2010, and after December 15, 2010 for Level 3 disclosure requirements, which we adopted in our third quarter of fiscal 2011. The adoption of ASU 2010-06 did not have any impact upon our financial position or results of operations since it related to additional disclosure requirements.

In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”), which amends ASC 605-25, “Revenue Recognition-Multiple-Element Arrangements.” ASU 2009-13 provides principles for the allocation of consideration among multiple-element arrangements, allowing more flexibility in identifying and accounting for separate deliverables. ASU 2009-13 introduces an estimated selling price method for allocating revenue to the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Accordingly, we adopted ASU 2009-13 on August 1, 2010. The adoption of ASU 2009-13 did not have a material effect on our financial position or results of operations.

Note 5.Other Comprehensive Income

The Company’s comprehensive income for the three and nine months ended April 30,October 31, 2011 and 2010 is set forth in the following table:

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Changes in the value of (i) the Canadian dollar against the United States dollar, (ii) the euro against the United States dollar and (iii) the British pound against the United States dollar affect our results of operations because a portion of the net assets of our Canadian subsidiaries (which are reported in our Specialty Packaging and Water Purification and Filtration segments)  are denominated and ultimately settled in United States dollars, but must be converted into its functional Canadian dollar currency. Furthermore, certain cash bank accounts, accounts receivable, and liabilities of our United States subsidiaries, Minntech and Mar Cor, are denominated and ultimately settled in euros or British pounds, but must be converted into their functional United States currency.

In order to hedge against the impact of fluctuations in the value of (i) the Canadian dollar relative to the United States dollar, (ii) the euro relative to the United States dollar and (iii) the British pound relative to the United States dollar on the conversion of such net assets into the functional currencies, we enter into short-term contracts to purchase Canadian dollars, euros and British pounds forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedge instruments. There were threetwo foreign currency forward contracts with an aggregate value of $4,379,000$2,592,000 at April 30,October 31, 2011, which covered certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies. Such contracts expired on May 31,November 30, 2011. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets at our subsidiaries that are denominated and ultimately settled in currencies other than their functional currencies. Under our credit facilities, such contracts to purchase Canadian dollars, euros and British pounds may not exceed $12,000,000 in an aggregate notional amount at any time. For the three and nine months ended April 30,October 31, 2011 and 2010, such forward contracts partially offset the impact on operations relating to certain assets and liabilities that were denominated in currencies other than our subsidiaries’ functional currencies and resulted in a net currency conversion loss, net of tax, of $54,000$5,000 and $139,000,$49,000, respectively, on the items hedged. Gains and losses related to the hedging contracts to buy Canadian dollars, euros and British pounds forward were immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not hold any derivative financial instruments for speculative or trading purposes.

Note 7.Fair Value Measurements

Fair Value Hierarchy

We apply the provisions of ASC 820,“Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and liabilities that are re-measuredremeasured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measuredremeasured and reported at fair

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value on a non-recurring basis. ASC 820 definesWe define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three level fair value hierarchy to prioritize the inputs used in valuations, as defined below:

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

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Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

As of April 30,October 31, 2011 and July 31, 2010,2011, our financial assets that are re-measuredremeasured at fair value on a recurring basis include bank deposits, certificates of deposit and money market funds that are classified as cash and cash equivalents in the Condensed Consolidated Balance Sheet.Sheets. As there are no withdrawal restrictions, they are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.

In addition, we have a contingent consideration liability recorded within acquisitions payable relating to the acquisition of ConFirm Acquisition, as further described in Note 3 to the Condensed Consolidated Financial Statements. The fair value of this liability was based on future sales projections of the ConFirm businessMonitoring Business under various potential scenarios for the one year period ending January 31, 2012 and weighting the probability of these outcomes.  At the date of the acquisition, these cash flow projections were discounted using a rate of 7%. The discount rate was based on the weighted average cost of capital of the acquired business plus a credit risk premium for non-performance risk. This analysis resulted in an initial contingent consideration liability of $656,000, which was subsequently adjusted to $775,000 at July 31, 2011 by recording the change in the fair value through our results of operations during the fourth quarter of our fiscal 2011. At October 31, 2011, the fair value of this contingent consideration liability decreased to $689,000. The $86,000 change in fair value was recorded as a decrease to acquisitions payable and general and administrative expenses in the Condensed Consolidated Financial Statements at October 31, 2011. This recent decrease in estimated fair value was driven by changes in the assumptions pertaining to the achievement of the specified sales levels, partially offset by the accretion of the liability for the time value of money. This fair value measurement was based on significant inputs not observed in the market and thus represented a Level 3 measurement.

On August 1, 2011 (the first day of our fiscal 2012), we recorded a $2,700,000 liability for the estimated fair value of contingent consideration and a $3,000,000 liability for the estimated fair value of the three year price floor relating to the acquisition of the Byrne Medical Business, as further described in Note 3 to the Condensed Consolidated Financial Statements. These fair value measurements were based on significant inputs not observed in the market and thus represent Level 3 measurements. The fair value of the contingent consideration liability was based on future gross profit projections of the Byrne Medical Business under various potential scenarios for the two year period ending July 31, 2013 and weighting the probability of these outcomes.  At the date of the acquisition, these cash flow projections were discounted using a rate of 14%. The discount rate was based on the weighted average cost of capital of the acquired business plus a credit risk premium for non-performance risk. The fair value of the three year price floor liability was determined using the

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Black-Scholes option valuation model, which is affected by our stock price and risk free interest rate as well as assumptions regarding a number of subjective variables, including, but are not limited to, the expected stock price volatility of our Common Stock over the expected life of the instrument and the expected dividend yield. These two liabilities will be adjusted periodically by recording changes in the fair value through our Condensed Consolidated Statements of Income driven by the time value of money and changes in the assumptions that were initially used in the valuations.  Accordingly, at October 31, 2011 we remeasured the fair value of the contingent consideration and the price floor to be $2,800,000 and $2,418,000, respectively. The $100,000 increase to the contingent consideration liability was due to the accretion of the liability for the time value of money and was recorded as an increase to acquisition payable and general and administrative expenses in the Condensed Consolidated Financial Statements at October 31, 2011. The $582,000 decrease to the fair value of the price floor (as determined by the Black-Scholes option valuation model) was recorded as a decrease to acquisitions payable and general and administrative expenses in the Condensed Consolidated Financial Statements at October 31, 2011 and was primarily due to the impact of our stock price being higher than at the time of the acquisition, the life of the price floor being less than three years and changes in the assumptions pertaining to the achievement of the specified sales levels. This fair value measurement was based on significant inputs not observed in the market and thus represented a Level 3 measurement. At April 30, 2011, we re-measured the liability and determined that the estimated fair value had not changed.expected stock price volatility.

The fair values of the Company’s financial instruments measured on a recurring basis were categorized as follows: